Invesco V.I. Technology Fund Annual Report to Shareholders December 31, 2011

Transcription

1 Annual Report to Shareholders December 31, 2011 The Fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth quarters, the lists appear in the Fund s semiannual and annual reports to shareholders. For the first and third quarters, the Fund files the lists with the Securities and Exchange Commission (SEC) on Form N-Q. The Fund s Form N-Q filings are available on the SEC website, sec.gov. Copies of the Fund s Forms N-Q may be reviewed and copied at the SEC Public Reference Room in Washington, D.C. You can obtain information on the operation of the Public Reference Room, including information about duplicating fee charges, by calling or , or by electronic request at the following address: publicinfo@sec.gov. The SEC file numbers for the Fund are and The Fund s most recent portfolio holdings, as filed on Form N-Q, have also been made available to insurance companies issuing variable annuity contracts and variable life insurance policies ( variable products ) that invest in the Fund. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, from our Client Services department at or at invesco.com/proxyguidelines. The information is also available on the SEC website, sec.gov. Information regarding how the Fund voted proxies related to its portfolio securities during the 12 months ended June 30, 2011, is available at invesco.com/proxysearch. The information is also available on the SEC website, sec.gov. Invesco Advisers, Inc. is an investment adviser; it provides investment advisory services to individual and institutional clients and does not sell securities. Invesco Distributors, Inc. is the U.S. distributor for Invesco Ltd. s retail mutual funds, exchange-traded funds and institutional money market funds. Both are wholly owned, indirect subsidiaries of Invesco Ltd. This report must be accompanied or preceded by a currently effective Fund prospectus and variable product prospectus, which contain more complete information, including sales charges and expenses. Investors should read each carefully before investing. Invesco Distributors, Inc. I-VITEC-AR-1

2 Management s Discussion of Fund Performance Performance summary For the fiscal year ended December 31, 2011, equity markets were quite volatile, and investors generally favored less economically sensitive sectors. Invesco V.I. Technology Fund significantly outperformed its style-specific benchmark, the BofA Merrill Lynch 100 Technology Index, primarily due to the Fund s security selection in the information technology services, computers and peripherals, and communications equipment industries. Your Fund s long-term performance appears later in this report. Fund vs. Indexes Total returns, 12/31/10 to 12/31/11, excluding variable product issuer charges. If variable product issuer charges were included, returns would be lower. Series I Shares 5.05% Series II Shares 5.32 S&P 500 Index (Broad Market Index) 2.09 BofA Merrill Lynch 100 Technology Index (price only) (Style-Specific Index) Lipper VUF Science & Technology Funds Category Average (Peer Group) 6.50 Source(s): Lipper Inc. How we invest We seek to grow capital by investing in companies we believe generate sustainable, superior earnings and cash flow growth that is not fully reflected in investor expectations or equity valuations. The Fund emphasizes companies believed to have a strategic advantage over their competition and operating in industries believed to be beneficiaries of secular trends. The Fund invests in industries such as hardware, software, telecommunications equipment and services, semiconductors and service-related companies in the information technology (IT) sector. We use a research-oriented bottom-up investment approach focusing on company fundamentals and growth prospects. We place great emphasis on companies exhibiting high returns on invested capital and generating free cash flow, metrics we believe are good indicators of financial health and growth potential. We seek companies with management teams that maintain high quality balance sheets and manageable debt levels. Valuation also plays a critical role in stock selection. Risk management is an integral part of our portfolio construction process as we attempt to limit volatility and downside risk. Only stocks that exhibit a proper balance of risk and reward are chosen for inclusion in the portfolio. We seek to accomplish this goal by thoroughly understanding the key business drivers of companies in which we invest. The portfolio is constructed with the goal of holding a diversified portfolio of stocks we believe are best suited to capitalize on secular trends prevalent in the IT sector. We may reduce or eliminate our holding in a stock when: A stock s price reaches its valuation target. A company s fundamentals change or deteriorate. It no longer meets our investment criteria. Market conditions and your Fund Equity markets were highly volatile during the fiscal year as investors weighed the competing issues of improved corporate profits, soft macroeconomic data and sovereign debt issues in Europe. In the U.S., corporate earnings increased, but often were overshadowed by concerns about high unemployment and a lack of consumer confidence. After generally rising through July, major equity indexes sold off precipitously in August as the U.S. received the first-ever downgrade to its credit rating from Standard & Poor s, and while the sovereign debt crisis unfolded in the eurozone, prompting fears of a double-dip recession. Equity markets rebounded in the fourth quarter of 2011, despite a lack of meaningful resolutions to improve the global economy. Major domestic equity indexes garnered positive returns for the fiscal year, and seven out of 10 sectors in the S&P 500 Index posted gains. Less economically sensitive sectors such as utilities, consumer staples and health care had the highest returns. Conversely, the financials, materials and industrials sectors were the market laggers and produced losses for the reporting period. On an absolute basis, the Fund produced a loss for the fiscal year, following its strong absolute performance from the prior year, primarily as a result of losses in the semiconductors, software and communications equipment industries. Outperformance relative to the Fund s style-specific index, however, was primarily attributable to security selection, with positive results also stemming from market allocation. Specifically, security selection in IT services, computers and peripherals and communications equipment contributed significantly to the Fund s relative performance. In terms of market allocation, relative overweight exposures to Internet and catalog retail and software were beneficial. Conversely, the Fund s security selection and underweight exposure to Internet software and services stocks detracted from relative performance. Additionally, the Fund s lack of holdings in the household Portfolio Composition By sector Information Technology 92.2% Consumer Discretionary 2.0 Health Care 1.1 Materials 1.1 Industrials 0.6 Financials 0.3 Money Market Funds Plus Other Assets Less Liabilities 2.7 Top 10 Equity Holdings* 1. Apple Inc. 9.8% 2. Google Inc.-Class A QUALCOMM, Inc Cognizant Technology Solutions Corp.-Class A EMC Corp Microsoft Corp Oracle Corp Check Point Software Technologies Ltd Citrix Systems, Inc Intel Corp. 2.5 Total Net Assets $102.2 million Total Number of Holdings* 76 The Fund s holdings are subject to change, and there is no assurance that the Fund will continue to hold any particular security. *Excluding money market fund holdings.

3 durables industry, an industry which is part of the style-specific index, negatively affected the Fund s relative performance in Top individual contributors to the Fund s absolute performance during the fiscal year included Apple and MasterCard. Following four years of exclusivity with AT&T (not a Fund holding), Apple expanded its distribution of the iphone to Verizon Wireless and Sprint (not Fund holdings) during Apple also unveiled the iphone 4 and the iphone 4S, as well as the new speech-recognition feature called Siri. Despite losing its visionary and founder, Steve Jobs, we believe Apple s unique competitive advantage to be sustainable. With regards to MasterCard, the company has managed expenses well and, in general, credit card volumes rebounded during the second half of the year. Top detractors from Fund performance included Rovi and Microsemi. Rovi is a global leader in digital entertainment products and services, while Microsemi designs and manufactures semiconductors for use in defense-related electronics, wireless phones, TVs and other devices. When Rovi announced expectations for the third quarter and overall 2011 fiscal year would fall short of analyst expectations, investors reacted negatively. Microsemi, on the other hand, announced revenue guidance above analyst estimates, yet suffered from poor investor sentiment toward defense budget related stocks. We continued to own Microsemi, and in fact increased our exposure on the company s weakness. We did, however, sell Rovi before the close of the reporting period. We remain confident about the medium-term outlook for technology stocks, primarily due to the potential for increased enterprise spending. Businesses have been reluctant to hire additional employees due to ancillary costs and, therefore, are using IT to compensate. Additionally, we believe emerging markets will continue to have increased technology needs. Going forward, we see possible improvements in credit markets, stabilization of demand patterns and conditions for secular growth. Longer term, we continue to see positive trends in the IT sector because we believe three key secular themes, which are independent of short-term catalysts, continue to offer support: 1) globalization productivity gains support increased technology use in international markets; 2) consumerization technology demand is consumerdriven; 3) proliferation technology continues to penetrate products ranging from automobiles and industrial controls to sporting gear and alternative energy. As always, we thank you for your continued investment in Invesco V.I. Technology Fund. The views and opinions expressed in management s discussion of Fund performance are those of Invesco Advisers, Inc. These views and opinions are subject to change at any time based on factors such as market and economic conditions. These views and opinions may not be relied upon as investment advice or recommendations, or as an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Fund. Statements of fact are from sources considered reliable, but Invesco Advisers, Inc. makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy. See important Fund and, if applicable, index disclosures later in this report. Warren Tennant Chartered Financial Analyst, portfolio manager, is lead manager of Invesco V.I. Technology Fund. Mr. Tennant joined Invesco in 2000 and was named a portfolio manager in 2007 before becoming lead manager of the Fund in He earned both a B.B.A. in finance and an M.B.A. from The University of Texas at Austin. Brian Nelson Chartered Financial Analyst, portfolio manager, is manager of Invesco V.I. Technology Fund. He joined Invesco in Mr. Nelson earned a B.A. from the University of California Santa Barbara and is a member of the CFA Society of San Francisco.

4 Your Fund s Long-Term Performance Results of a $10,000 Investment Oldest Share Class(es) Fund and index data from 12/31/01* $20,000 15,000 $13,333 S&P 500 Index 1 10,000 5,000 $12,334 BofA Merrill Lynch 100 Technology Index (price-only) 1 $11,968 Lipper VUF Science & Technology Funds Category Average 1 $9,884 Series I Shares 0 12/31/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09 12/10 12/11 1 Source: Lipper Inc. * During the reporting period, Invesco changed its policy regarding growth of $10,000 charts. For funds older than 10 years, we previously showed performance since inception. Going forward, we will show performance for the most recent 10 years, since this more accurately reflects the experience of the typical shareholder. As a result, charts now may include benchmarks that did not appear previously, because the funds inception pre-dated the benchmarks inception. Also, all charts will now be presented using a linear format. Past performance cannot guarantee comparable future results. Average Annual Total Returns As of 12/31/11 Series I Shares Inception (5/20/97) 2.96% 10 Years Years Year 5.05 Series II Shares 10 Years 0.39% 5 Years Year 5.32 Series II shares incepted on April 30, Performance shown prior to that date is that of Series I shares, restated to reflect the higher 12b-1 fees applicable to Series II. Series I performance reflects any applicable fee waivers or expense reimbursements. The performance of the Fund s Series I and Series II share classes will differ primarily due to different class expenses. The performance data quoted represent past performance and cannot guarantee comparable future results; current performance may be lower or higher. Please contact your variable product issuer or financial adviser for the most recent month-end variable product performance. Performance figures reflect Fund expenses, reinvested distributions and changes in net asset value. Investment return and principal value will fluctuate so that you may have a gain or loss when you sell shares. The total annual Fund operating expense ratio set forth in the most recent Fund prospectus as of the date of this report for Series I and Series II shares was 1.14% and 1.39%, respectively. The expense ratios presented above may vary from the expense ratios presented in other sections of this report that are based on expenses incurred during the period covered by this report., a series portfolio of AIM Variable Insurance Funds (Invesco Variable Insurance Funds), is currently offered through insurance companies issuing variable products. You cannot purchase shares of the Fund directly. Performance figures given represent the Fund and are not intended to reflect actual variable product values. They do not reflect sales charges, expenses and fees assessed in connection with a variable product. Sales charges, expenses and fees, which are determined by the variable product issuers, will vary and will lower the total return. The most recent month-end performance data at the Fund level, excluding variable product charges, is available at As mentioned above, for the most recent month-end performance including variable product charges, please contact your variable product issuer or financial adviser.

5 s investment objective is long-term growth of capital. Unless otherwise stated, information presented in this report is as of December 31, 2011, and is based on total net assets. Unless otherwise noted, all data provided by Invesco. To access your Fund s reports/prospectus, visit invesco.com/fundreports. Principal risks of investing in the Fund Foreign securities risk. The Fund s foreign investments may be affected by changes in a foreign country s exchange rates; political and social instability; changes in economic or taxation policies; difficulties when enforcing obligations; decreased liquidity; and increased volatility. Foreign companies may be subject to less regulation resulting in less publicly available information about the companies Initial Public Offering (IPO) risk. The prices of IPO securities may fluctuate more than prices of equity securities of companies with longer trading histories. In addition, companies offering securities in IPOs may have less experienced management or limited operating histories. There can be no assurance that the Fund will have favorable IPO investment opportunities. Management risk. The investment techniques and risk analysis used by the Fund s portfolio managers may not produce the desired results. Market risk. The prices of and the income generated by the Fund s securities may decline in response to, among other things, investor sentiment; general economic and market conditions; regional or global instability; and currency and interest rate fluctuations. Sector fund risk. The Fund s investments are concentrated in a comparatively narrow segment of the economy, which may make the Fund more volatile than non-concentrated funds. Small- and mid-capitalization risks. Stocks of small and mid-sized companies tend to be more vulnerable to adverse developments in the above factors and may have little or no operating history or track record of success, and limited product lines, markets, management and financial resources. The securities of small and mid-sized companies may be more volatile due to less market interest and less publicly available information about the issuer. They also may be illiquid or restricted as to resale, or may trade less frequently and in smaller volumes, all of which may cause difficulty when establishing or closing a position at a desirable price. Technology sector risk. Many products and services offered in technologyrelated industries are subject to rapid obsolescence, which may lower the value of the issuers in this sector. About indexes used in this report The S&P 500 Index is an unmanaged index considered representative of the U.S. stock market. The BofA Merrill Lynch 100 Technology Index is a price-only equal-dollar weighted index of 100 stocks designed to measure the performance of a cross section of large, actively traded technology stocks and American Depositary Receipts. The Lipper VUF Science & Technology Funds Category Average represents an average of all of the variable insurance underlying funds in the Lipper Science & Technology Funds category. The Fund is not managed to track the performance of any particular index, including the indexes defined here, and consequently, the performance of the Fund may deviate significantly from the performance of the indexes. A direct investment cannot be made in an index. Unless otherwise indicated, index results include reinvested dividends, and they do not reflect sales charges. Performance of the peer group, if applicable, reflects fund expenses; performance of a market index does not. Other information The Chartered Financial Analyst (CFA ) designation is globally recognized and attests to a charterholder s success in a rigorous and comprehensive study program in the field of investment management and research analysis. Industry classifications used in this report are generally according to the Global Industry Classification Standard, which was developed by and is the exclusive property and a service mark of MSCI Inc. and Standard & Poor s. The returns shown in management s discussion of Fund performance are based on net asset values calculated for shareholder transactions. Generally accepted accounting principles require adjustments to be made to the net assets of the Fund at period end for financial reporting purposes, and as such, the net asset values for shareholder transactions and the returns based on those net asset values may differ from the net asset values and returns reported in the Financial Highlights. Additionally, the returns and net asset values shown throughout this report are at the Fund level only and do not include variable product issuer charges. If such charges were included, the total returns would be lower.

6 Schedule of Investments (a) December 31, 2011 Shares Value Shares Value Common Stocks & Other Equity Interests 97.26% Application Software 7.23% Autodesk, Inc. (b) 25,447 $ 771,807 Citrix Systems, Inc. (b) 42,767 2,596,812 NICE Systems Ltd. ADR (Israel) (b) 31,386 1,081,248 Nuance Communications, Inc. (b) 43,357 1,090,862 Salesforce.com, Inc. (b) 7, ,011 Taleo Corp. Class A (b) 9, ,835 TIBCO Software Inc. (b) 29, ,214 7,384,789 Communications Equipment 9.47% ADTRAN, Inc. 19, ,193 Ciena Corp. (b) 50, ,324 F5 Networks, Inc. (b) 9,919 1,052,604 Finisar Corp. (b) 19, ,455 JDS Uniphase Corp. (b) 63, ,907 Juniper Networks, Inc. (b) 13, ,596 Polycom, Inc. (b) 40, ,866 QUALCOMM, Inc. 77,572 4,243,188 Sonus Networks, Inc. (b) 172, ,641 Sycamore Networks, Inc. (b) 19, ,409 Ubiquiti Networks Inc. (b) 26, ,444 9,675,627 Computer Hardware 9.78% Apple Inc. (b) 24,691 9,999,855 Computer Storage & Peripherals 6.62% EMC Corp. (b) 154,754 3,333,401 NetApp, Inc. (b) 30,474 1,105,292 SanDisk Corp. (b) 22,095 1,087,295 Synaptics Inc. (b) 24, ,168 Western Digital Corp. (b) 16, ,439 6,769,595 Data Processing & Outsourced Services 9.98% Alliance Data Systems Corp. (b) 12,792 1,328,321 Genpact Ltd. (Bermuda) (b) 83,942 1,254,933 MasterCard, Inc. Class A 6,522 2,431,532 VeriFone Systems, Inc. (b) 27, ,226 Visa Inc. Class A 24,151 2,452,051 Western Union Co. 43, ,601 Wright Express Corp. (b) 17, ,978 10,204,642 Electronic Manufacturing Services 1.79% Jabil Circuit, Inc. 68,268 $ 1,342,149 TE Connectivity Ltd. 15, ,800 1,830,949 Fertilizers & Agricultural Chemicals 1.07% Monsanto Co. 15,547 1,089,378 Internet Retail 1.97% Amazon.com, Inc. (b) 11,605 2,008,825 Internet Software & Services 8.65% ebay Inc. (b) 35,794 1,085,632 Google Inc. Class A (b) 7,730 4,992,807 Responsys, Inc. (b) 30, ,629 ValueClick, Inc. (b) 64,484 1,050,444 Velti PLC (Ireland) (b) 44, ,416 VeriSign, Inc. 31,995 1,142,862 8,842,790 IT Consulting & Other Services 6.63% Accenture PLC Class A (Ireland) 26,251 1,397,341 Cognizant Technology Solutions Corp. Class A (b) 55,071 3,541,616 International Business Machines Corp. 9,984 1,835,858 6,774,815 Life Sciences Tools & Services 1.06% Agilent Technologies, Inc. (b) 31,002 1,082,900 Other Diversified Financial Services 0.35% BlueStream Ventures L.P. (Acquired 08/03/00-06/13/08; Acquisition Cost $3,149,655) (c)(d) 357,428 Research & Consulting Services 0.65% Acacia Research-Acacia Technologies (b) 18, ,563 Semiconductor Equipment 3.24% ASML Holding N.V. New York Shares (Netherlands) 11, ,997 Cymer, Inc. (b) 19, ,362 Intermolecular Inc. (b) 51, ,071 Novellus Systems, Inc. (b) 19, ,684 Teradyne, Inc. (b) 44, ,780 3,309,894 Semiconductors 16.01% ARM Holdings PLC ADR (United Kingdom) 8, ,761 Avago Technologies Ltd. (Singapore) 19, ,748 Broadcom Corp. Class A (b) 64,252 1,886,439 Cypress Semiconductor Corp. (b) 70,135 1,184,580 Diodes Inc. (b) 26, ,087 See accompanying Notes to Financial Statements which are an integral part of the financial statements.

7 Shares Value Shares Value Semiconductors (continued) Intel Corp. 103,235 $ 2,503,449 Lattice Semiconductor Corp. (b) 166, ,581 Marvell Technology Group Ltd. (b) 73,572 1,018,972 Micron Technology, Inc. (b) 128, ,020 Microsemi Corp. (b) 146,565 2,454,964 ON Semiconductor Corp. (b) 78, ,507 Semtech Corp. (b) 69,787 1,732,113 Skyworks Solutions, Inc. (b) 40, ,261 Volterra Semiconductor Corp. (b) 27, ,043 Xilinx, Inc. 14, ,444 16,356,969 Systems Software 12.76% Ariba Inc. (b) 33, ,121 Check Point Software Technologies Ltd. (Israel) (b) 51,230 2,691,624 CommVault Systems, Inc. (b) 14, ,212 Fortinet Inc. (b) 50,588 1,103,324 Systems Software (continued) Imperva Inc. (b) 11,213 $ 390,325 Microsoft Corp. 115,590 3,000,716 Oracle Corp. 109,763 2,815,421 Red Hat, Inc. (b) 15, ,621 Symantec Corp. (b) 52, ,746 13,037,110 Total Common Stocks & Other Equity Interests (Cost $85,050,083) 99,392,129 Money Market Funds 2.65% Liquid Assets Portfolio Institutional Class (e) 1,352,232 1,352,232 Premier Portfolio Institutional Class (e) 1,352,233 1,352,233 Total Money Market Funds (Cost $2,704,465) 2,704,465 TOTAL INVESTMENTS 99.91% (Cost $87,754,548) 102,096,594 OTHER ASSETS LESS LIABILITIES 0.09% 95,761 NET ASSETS % $102,192,355 Investment Abbreviations: ADR American Depositary Receipt Notes to Schedule of Investments: (a) Industry and/or sector classifications used in this report are generally according to the Global Industry Classification Standard, which was developed by and is the exclusive property and a service mark of MSCI Inc. and Standard & Poor s. (b) Non-income producing security. (c) Security purchased or received in a transaction exempt from registration under the Securities Act of 1933, as amended. The security may be resold pursuant to an exemption from registration under the 1933 Act, typically to qualified institutional buyers. The value of this security at December 31, 2011 represented less than 1% of the Fund s Net Assets. (d) The Fund has a remaining commitment of $101,250 to purchase additional interests in BlueStream Ventures L.P., which is subject to the terms of the limited partnership agreement. (e) The money market fund and the Fund are affiliated by having the same investment adviser. See accompanying Notes to Financial Statements which are an integral part of the financial statements.

8 Statement of Assets and Liabilities December 31, 2011 Statement of Operations For the year ended December 31, 2011 Assets: Investments, at value (Cost $85,050,083) $ 99,392,129 Investments in affiliated money market funds, at value and cost 2,704,465 Total investments, at value (Cost $87,754,548) 102,096,594 Receivable for: Investments sold 682,733 Fund shares sold 4,336 Dividends 335 Investment for trustee deferred compensation and retirement plans 33,079 Total assets 102,817,077 Liabilities: Payable for: Investments purchased 146,181 Fund shares reacquired 325,832 Accrued fees to affiliates 69,587 Accrued other operating expenses 31,114 deferred compensation and retirement plans 52,008 Total liabilities 624,722 Net assets applicable to shares outstanding $102,192,355 Net assets consist of: Shares of beneficial interest $ 87,568,585 Undistributed net investment income 1,881,365 Undistributed net realized gain (loss) (1,599,641) Unrealized appreciation 14,342,046 $102,192,355 Net Assets: Series I $100,579,223 Series II $ 1,613,132 Investment income: Dividends (net of foreign withholding taxes of $3,957) $ 603,217 Dividends from affiliated money market funds (includes securities lending income of $4,581) 8,048 Total investment income 611,265 Expenses: Advisory fees 920,424 Administrative services fees 352,655 Custodian fees 6,404 Distribution fees Series II 3,713 Transfer agent fees 23,945 s and officers fees and benefits 22,474 Other 42,864 Total expenses 1,372,479 Less: Fees waived (4,687) Net expenses 1,367,792 Net investment income (loss) (756,527) Realized and unrealized gain (loss) from: Net realized gain from: Investment securities 11,673,892 Foreign currencies 1,974 11,675,866 Change in net unrealized appreciation (depreciation) of: Investment securities (16,912,186) Foreign currencies (795) (16,912,981) Net realized and unrealized gain (loss) (5,237,115) Net increase (decrease) in net assets resulting from operations $ (5,993,642) Shares outstanding, $0.001 par value per share, with an unlimited number of shares authorized: Series I 6,635,114 Series II 108,554 Series I: Net asset value per share $ Series II: Net asset value per share $ See accompanying Notes to Financial Statements which are an integral part of the financial statements.

9 Statement of Changes in Net Assets For the years ended December 31, 2011 and Operations: Net investment income (loss) $ (756,527) $ 208,234 Net realized gain 11,675,866 7,911,740 Change in net unrealized appreciation (depreciation) (16,912,981) 14,071,941 Net increase (decrease) in net assets resulting from operations (5,993,642) 22,191,915 Distributions to shareholders from net investment income: Series I (209,892) Series II (1,326) Total distributions from net investment income (211,218) Share transactions net: Series I (21,625,874) (13,096,747) Series II 520, ,157 Net increase (decrease) in net assets resulting from share transactions (21,105,146) (12,474,590) Net increase (decrease) in net assets (27,310,006) 9,717,325 Net assets: Beginning of year 129,502, ,785,036 End of year (includes undistributed net investment income of $1,881,365 and $2,101,126, respectively) $102,192,355 $129,502,361 Notes to Financial Statements December 31, 2011 NOTE 1 Significant Accounting Policies (the Fund ) is a series portfolio of AIM Variable Insurance Funds (Invesco Variable Insurance Funds) (the Trust ). The Trust is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the 1940 Act ), as an open-end series management investment company consisting of twenty-eight separate portfolios, (each constituting a Fund ). The assets, liabilities and operations of each portfolio are accounted for separately. Information presented in these financial statements pertains only to the Fund. Matters affecting each Fund or class will be voted on exclusively by the shareholders of such Fund or class. Current Securities and Exchange Commission ( SEC ) guidance, however, requires participating insurance companies offering separate accounts to vote shares proportionally in accordance with the instructions of the contract owners whose investments are funded by shares of each Fund or class. The Fund s investment objective is long-term growth of capital. The Fund currently offers two classes of shares, Series I and Series II, both of which are offered to insurance company separate accounts funding variable annuity contracts and variable life insurance policies ( variable products ). The following is a summary of the significant accounting policies followed by the Fund in the preparation of its financial statements. A. Security Valuations Securities, including restricted securities, are valued according to the following policy. A security listed or traded on an exchange (except convertible bonds) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on prices furnished by independent pricing services or market makers. When such securities are valued by an independent pricing service they may be considered fair valued. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and ask prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and ask prices. For purposes of determining net asset value per share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange ( NYSE ). Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded. Debt obligations (including convertible bonds) and unlisted equities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as

10 institution-size trading in similar groups of securities, developments related to specific securities, dividend rate, yield, quality, type of issue, coupon rate, maturity, individual trading characteristics and other market data. Debt securities are subject to interest rate and credit risks. In addition, all debt securities involve some risk of default with respect to interest and/or principal payments. Foreign securities (including foreign exchange contracts) are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the NYSE. If market quotations are available and reliable for foreign exchange traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that are significant and make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of s. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trade is not the current value as of the close of the NYSE. Foreign securities meeting the approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, American Depositary Receipts and domestic and foreign index futures. Foreign securities may have additional risks including exchange rate changes, potential for sharply devalued currencies and high inflation, political and economic upheaval, the relative lack of issuer information, relatively low market liquidity and the potential lack of strict financial and accounting controls and standards. Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources. The last bid price may be used to value equity securities. The mean between the last bid and asked prices is used to value debt obligations, including Corporate Loans. Securities for which market quotations are not readily available or are unreliable are valued at fair value as determined in good faith by or under the supervision of the Trust s officers following procedures approved by the Board of s. Issuer specific events, market trends, bid/ask quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security s fair value. Valuations change in response to many factors including the historical and prospective earnings of the issuer, the value of the issuer s assets, general economic conditions, interest rates, investor perceptions and market liquidity. Because of the inherent uncertainties of valuation, the values reflected in the financial statements may materially differ from the value received upon actual sale of those investments. B. Securities Transactions and Investment Income Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income is recorded on the accrual basis from settlement date. Dividend income (net of withholding tax, if any) is recorded on the ex-dividend date. The Fund may periodically participate in litigation related to Fund investments. As such, the Fund may receive proceeds from litigation settlements. Any proceeds received are included in the Statement of Operations as realized gain (loss) for investments no longer held and as unrealized gain (loss) for investments still held. Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of net realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the net realized and unrealized gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Fund s net asset value and, accordingly, they reduce the Fund s total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Fund and the investment adviser. The Fund allocates income and realized and unrealized capital gains and losses to a class based on the relative net assets of each class. C. Country Determination For the purposes of making investment selection decisions and presentation in the Schedule of Investments, the investment adviser may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer s securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America, unless otherwise noted. D. Distributions Distributions from income and net realized capital gain, if any, are generally paid to separate accounts of participating insurance companies annually and recorded on ex-dividend date. E. Federal Income Taxes The Fund intends to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to distribute substantially all of the Fund s taxable earnings to shareholders. As such, the Fund will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. The Fund files tax returns in the U.S. Federal jurisdiction and certain other jurisdictions. Generally, the Fund is subject to examinations by such taxing authorities for up to three years after the filing of the return for the tax period. F. Expenses Fees provided for under the Rule 12b-1 plan of a particular class of the Fund and which are directly attributable to that class are charged to the operations of such class. All other expenses are allocated among the classes based on relative net assets. G. Accounting Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ( GAAP ) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including estimates and assumptions related to

11 taxation. Actual results could differ from those estimates by a significant amount. In addition, the Fund monitors for material events or transactions that may occur or become known after the period-end date and before the date the financial statements are released to print. H. Indemnifications Under the Trust s organizational documents, each, officer, employee or other agent of the Trust is indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts, including the Fund s servicing agreements that contain a variety of indemnification clauses. The Fund s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. The risk of material loss as a result of such indemnification claims is considered remote. I. Other Risks The Fund s investments are concentrated in a comparatively narrow segment of the economy, which may make the Fund more volatile. Many products and services offered in technology-related industries are subject to rapid obsolescence, which may lower the value of the issuers in this sector. J. Securities Lending The Fund may lend portfolio securities having a market value up to one-third of the Fund s total assets. Such loans are secured by collateral equal to no less than the market value of the loaned securities determined daily by the securities lending provider. Such collateral will be cash or debt securities issued or guaranteed by the U.S. Government or any of its sponsored agencies. Cash collateral received in connection with these loans is invested in short-term money market instruments or affiliated money market funds and is shown as such on the Schedule of Investments. It is the Fund s policy to obtain additional collateral from or return excess collateral to the borrower by the end of the next business day, following the valuation date of the securities loaned. Therefore, the value of the collateral held may be temporarily less than the value of the securities on loan. Lending securities entails a risk of loss to the Fund if and to the extent that the market value of the securities loaned were to increase and the borrower did not increase the collateral accordingly, and the borrower fails to return the securities. Upon the failure of the borrower to return the securities, collateral may be liquidated and the securities may be purchased on the open market to replace the loaned securities. The Fund could experience delays and costs in gaining access to the collateral. The Fund bears the risk of any deficiency in the amount of the collateral available for return to the borrower due to any loss on the collateral invested. Dividends received on cash collateral investments for securities lending transactions, which are net of compensation to counterparties, is included in Dividends from affiliated money market funds on the Statement of Operations. The aggregate value of securities out on loan is shown as a footnote on the Statement of Assets and Liabilities, if any. K. Foreign Currency Translations Foreign currency is valued at the close of the NYSE based on quotations posted by banks and major currency dealers. Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at date of valuation. Purchases and sales of portfolio securities (net of foreign taxes withheld on disposition) and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Fund does not separately account for the portion of the results of operations resulting from changes in foreign exchange rates on investments and the fluctuations arising from changes in market prices of securities held. The combined results of changes in foreign exchange rates and the fluctuation of market prices on investments (net of estimated foreign tax withholding) are included with the net realized and unrealized gain or loss from investments in the Statement of Operations. Reported net realized foreign currency gains or losses arise from (1) sales of foreign currencies, (2) currency gains or losses realized between the trade and settlement dates on securities transactions, and (3) the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates. The Fund may invest in foreign securities which may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. L. Foreign Currency Contracts The Fund may enter into foreign currency contracts to manage or minimize currency or exchange rate risk. The Fund may also enter into foreign currency contracts for the purchase or sale of a security denominated in a foreign currency in order to lock in the U.S. dollar price of that security. A foreign currency contract is an obligation to purchase or sell a specific currency for an agreed-upon price at a future date. The use of foreign currency contracts does not eliminate fluctuations in the price of the underlying securities the Fund owns or intends to acquire but establishes a rate of exchange in advance. Fluctuations in the value of these contracts are measured by the difference in the contract date and reporting date exchange rates and are recorded as unrealized appreciation (depreciation) until the contracts are closed. When the contracts are closed, realized gains (losses) are recorded. Realized and unrealized gains (losses) on the contracts are included in the Statement of Operations. The primary risks associated with foreign currency contracts include failure of the counterparty to meet the terms of the contract and the value of the foreign currency changing unfavorably. These risks may be in excess of the amounts reflected in the Statement of Assets and Liabilities. NOTE 2 Advisory Fees and Other Fees Paid to Affiliates The Trust has entered into a master investment advisory agreement with Invesco Advisers, Inc. (the Adviser or Invesco ). Under the terms of the investment advisory agreement, the Fund pays an advisory fee to the Adviser based on the annual rate of the Fund s average daily net assets as follows: Average Daily Net Assets First $250 million 0.75% Next $250 million 0.74% Next $500 million 0.73% Next $1.5 billion 0.72% Next $2.5 billion 0.71% Next $2.5 billion 0.70% Next $2.5 billion 0.69% Over $10 billion 0.68% Rate

12 Under the terms of a master sub-advisory agreement between the Adviser and each of Invesco Asset Management Deutschland GmbH, Invesco Asset Management Limited, Invesco Asset Management (Japan) Limited, Invesco Australia Limited, Invesco Hong Kong Limited, Invesco Senior Secured Management, Inc. and Invesco Canada Ltd. (collectively, the Affiliated Sub-Advisers ) the Adviser, not the Fund, may pay 40% of the fees paid to the Adviser to any such Affiliated Sub-Adviser(s) that provide discretionary investment management services to the Fund based on the percentage of assets allocated to such Sub-Adviser(s). The Adviser has contractually agreed, through at least April 30, 2013, to waive advisory fees and/or reimburse expenses to the extent necessary to limit total annual fund operating expenses after fee waiver and/or expense reimbursement (excluding certain items discussed below) of Series I shares to 1.30% and Series II shares to 1.45% of average daily net assets. In determining the Adviser s obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the total annual fund operating expenses after fee waiver and/or expense reimbursement to exceed the numbers reflected above: (1) interest; (2) taxes; (3) dividend expense on short sales; (4) extraordinary or non-routine items, including litigation expenses; and (5) expenses that the Fund has incurred but did not actually pay because of an expense offset arrangement. Unless the Board of the s and Invesco mutually agree to amend or continue the fee waiver agreement, it will terminate on April 30, The Adviser did not waive fees and/or reimburse expenses during the period under this expense limitation. Further, the Adviser has contractually agreed, through at least June 30, 2012, to waive the advisory fee payable by the Fund in an amount equal to 100% of the net advisory fees the Adviser receives from the affiliated money market funds on investments by the Fund of uninvested cash (excluding investments of cash collateral from securities lending) in such affiliated money market funds. For the year ended December 31, 2011, the Adviser waived advisory fees of $4,687. The Trust has entered into a master administrative services agreement with Invesco pursuant to which the Fund has agreed to pay Invesco a fee for costs incurred in providing accounting services and fund administrative services to the Fund and to reimburse Invesco for administrative services fees paid to insurance companies that have agreed to provide services to the participants of separate accounts. These administrative services provided by the insurance companies may include, among other things: the printing of prospectuses, financial reports and proxy statements and the delivery of the same to existing participants; the maintenance of master accounts; the facilitation of purchases and redemptions requested by the participants; and the servicing of participants accounts. Pursuant to such agreement, for the year ended December 31, 2011, Invesco was paid $50,000 for accounting and fund administrative services and reimbursed $302,655 for services provided by insurance companies. The Trust has entered into a transfer agency and service agreement with Invesco Investment Services, Inc. ( IIS ) pursuant to which the Fund has agreed to pay IIS a fee for providing transfer agency and shareholder services to the Fund and reimburse IIS for certain expenses incurred by IIS in the course of providing such services. For the year ended December 31, 2011, expenses incurred under the agreement are shown in the Statement of Operations as transfer agent fees. The Trust has entered into a master distribution agreement with Invesco Distributors, Inc. ( IDI ) to serve as the distributor for the Fund. The Trust has adopted a plan pursuant to Rule 12b-1 under the 1940 Act with respect to the Fund s Series II shares (the Plan ). The Fund, pursuant to the Plan, pays IDI compensation at the annual rate of 0.25% of the Fund s average daily net assets of Series II shares. Of the Plan payments, up to 0.25% of the average daily net assets of the Series II shares may be paid to insurance companies who furnish continuing personal shareholder services to customers who purchase and own Series II shares of the Fund. For the year ended December 31, 2011, expenses incurred under the Plan are detailed in the Statement of Operations as distribution fees. Certain officers and trustees of the Trust are officers and directors of the Adviser, Invesco Ltd., IIS and/or IDI. NOTE 3 Additional Valuation Information GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, under current market conditions. GAAP establishes a hierarchy that prioritizes the inputs to valuation methods giving the highest priority to readily available unadjusted quoted prices in an active market for identical assets (Level 1) and the lowest priority to significant unobservable inputs (Level 3) generally when market prices are not readily available or are unreliable. Based on the valuation inputs, the securities or other investments are tiered into one of three levels. Changes in valuation methods may result in transfers in or out of an investment s assigned level: Level 1 Prices are determined using quoted prices in an active market for identical assets. Level 2 Prices are determined using other significant observable inputs. Observable inputs are inputs that other market participants may use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves, loss severities, default rates, discount rates, volatilities and others. Level 3 Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used. Unobservable inputs reflect the Fund s own assumptions about the factors market participants would use in determining fair value of the securities or instruments and would be based on the best available information. The following is a summary of the tiered valuation input levels, as of December 31, The level assigned to the securities valuations may not be an indication of the risk or liquidity associated with investing in those securities. Because of the inherent uncertainties of valuation, the values reflected in the financial statements may materially differ from the value received upon actual sale of those investments. During the year ended December 31, 2011, there were no significant transfers between investment levels. Level 1 Level 2 Level 3 Total Equity Securities $101,739,166 $ $357,428 $102,096,594